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Tuesday, January 17, 2012

Four EU Freedoms --- two too many for Greece!

One of the great achievements of the EU has been to create a frontier-free area within which (1) people, (2) goods, (3) services and (4) money can all move around freely. This four-fold freedom of movement is sometimes called “the four freedoms”. If the Greek economy is to have a future, two of these freedoms must be constrained during a period of transition --- the freedom of movement of goods and the freedom of movement of capital.

If I were a Greek, I would certainly transfer my Euro-savings to a bank outside Greece to protect against the risk that my Greek bank goes bankrupt, that my Greek deposits become frozen or that my Euro-deposits are converted into new drachma. Since EU-elites have warned me for almost 2 years that all of this might happen, I would consider myself prudent instead of unpatriotic.

If I were a Greek, I would certainly buy cheaper imported products instead of more expensive domestic ones. Since wasting money is not a prudent thing, I would consider myself prudent instead of unpatriotic.

So here you have it: what is prudent instead of unpatriotic at the level of the individual is unpatriotic and imprudent at the level of the entire economy. No economy can survive if its capital and production are withdrawn from it on a sustained basis (unless the country sits on the world's largest oil reserves).

"...and that, dear Abby, is how we got into trouble since the EU/Euro. What should we do? Your Greek friend."

"Dear Greek friend, if those 2 processes got you into trouble, just reverse them! Yours, Abby!"

"Greece has to become competitive!" is one of today's slogans. Certainly a very plausible slogan but completely implausible from the standpoint of short-term realization. The irrefutable wisdom says "You have to learn how to walk before you try to run". Exposing the Greek economy to international competition and expecting it to compete successfully would be like sending a talented but not fully developed Greek soccer player to Real Madrid and warning him, once he got used to the standard of living there, that he had to improve his game so that he wouldn't get kicked out of the team.

"Infant-industry protection" is the technical jargon for what I am talking about. The purpose of it is to protect a nascent and/or developing economy from unbearable foreign competition so that it can develop its own competitive advantages. The problem with infant-industry protection is that when it is misused for the protection of national insufficiencies instead of the development of competitive advantages, it defeats its original purpose.

And "capital controls" is the technical term for making sure that capital is not withdrawn from the economy.

Now, free marketers will scream when they hear expressions like "infant-industry protection" or "capital controls". So why don't I scream when I am a convinced free marketer? Because it all depends on the implementation. If the instruments are embedded into a long-term economic development plan and if the respective laws are transparent and for a limited transition period where everyone knows at the outset what will happen at the end of the transition period, it can work successfully.

Some time ago I wrote this article where I proposed one way to accomplish the above. There certainly could be many other ways. What matters is to reach the result that Greece becomes a value-generating economy which can employ its people. If that result is not reached, Greece will be dependent on subsidies from abroad forever (or become very, very poor).